THE NEAR-COLLAPSE of Germany's Sachsen LB last year was brought about by board of director ignorance about the risky dealings of the bank's Irish subsidiary.

A report by consultants Ernst & Young has found that, even as the subprime credit crisis began to spread from the US to Europe last year, the board approved new off-balance sheet ventures, the kind of business that brought the bank to the brink of collapse.

"There were two problems at the bank: the risk management didn't function and the bank was involved in a financial volume that exceeded all limits," said Stanislaw Tillich, Saxon finance minister.

After experiencing serious liquidity problems last August, the Sachsen state bank was sold off at a knock-down price.

The 200-page report documents the activities of Sachsen LB Europe plc (SLBE) and three off-balance sheet instruments or conduits, the value of which grew from €4 billion in 2003 to €26 billion in 2007. The volume of one conduit, Ormond Quay, swelled to €43 billion.

The Dublin operation invested almost exclusively in high-risk products worst hit by last year's financial turbulence. At the same time the Leipzig-based parent company became increasingly dependent on the Irish subsidiary's business.

Dublin contributed 82.3 per cent to the bank's financial results between 2002 and 2006, the report found, a disastrous situation when the credit crisis hit.

Compounding the damage, the authors say, is the fact that the bank's board took no measures to act after the subprime home loans sector began to bite in March 2007.

"On the contrary, the activities were expanded," said the report, noting the founding last March of the $2.2 billion structured investment vehicle (SIV) Sachsen Funding. "The risks were either not seen by the board or underestimated in their volatility."

They call into question the competence of the Sachsen LB board, while saying members could only act on information available.

What the Ernst & Young report makes clear is that the information available on the Dublin operations was patchy at best. The board was informed about the creation of the conduits but, in subsequent reports, not fully about their activities.

Particularly problematic, the report says, is the unusual decision to let Sachsen LB Europe guarantee the full financial risk of the conduits, a fact the report suggests was not made clear to the board.